Should you delay taking an annuity?

by Ryan

The fallout from the global financial crisis of 2008 is still bearing down on annuity rates, leading many people to think about delaying taking an annuity for a few years until things pick up. However, this may not prove to be such a wise move, as it looks as if pension annuity rates are going to stay low for the foreseeable future.

The main reason for this is that gilt yields, which are the return you receive for investing in government debt, have been falling across the board as governments struggle to keep a lid on their national debts. Traditionally, pension funds have been invested in gilts because they are considered to be a safe investment that provides a steady income. However, successive rounds of quantitative easing – the process of printing money in order to lubricate the economy – by central banks have exerted a downwards pressure on gilt yields, and this trend is expected to continue in the years to come.

Another factor that is exerting a downwards pressure on annuity rates is the introduction of tighter solvency regulations in the insurance industry. These mean that companies are now required to hold more capital, resulting in higher premiums and lower payouts for the consumer.

However, it would be a mistake to delay taking an annuity for a couple of years in the hope of obtaining a better rate further down the line. Even if rates climb substantially over the next two years, the amount of money that you would miss out on in the interim would more than cancel this out. For example, at the time of writing, a 65-year-old woman with a £100,000 pension would be able to get an annual income of £5,900 today, whereas a 67-year-old woman with the same pension would get a better rate of £6,165. On the other hand, if the younger woman delays her pension by two years, she will miss out on two years of income – or £11,800.

Even though her annuity would increase by £264 for every year she delays taking her annuity, it would take her 44 years to recoup the money she had missed out on in those years. Even if annuity rates stayed constant, which is unlikely, she would have to wait until she was 109 years old before this move would make financial sense. While nothing is certain, especially in the current economic climate, it is highly unlikely that annuity rates will rise sufficiently over the next few years to make delaying an annuity worthwhile.

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